According to the Reuters-University of Michigan Survey of Consumers earlier
this month, nearly two-thirds of consumers expected that the present downturn
would last for five more years. President Obama, in his first press conference,
evoked the Depression in warning of a “negative spiral” that “becomes difficult
for us to get out of” and suggested the possibility of a “lost decade,” as in
Japan in the 1990s. ...

The attention paid to the Depression story may seem a logical consequence of
our economic situation. But the retelling, in fact, is a cause of the current
situation — because the Great Depression serves as a model for our expectations,
damping what John Maynard Keynes called our “animal spirits,” reducing
consumers’ willingness to spend and businesses’ willingness to hire and expand.
The Depression narrative could easily end up as a self-fulfilling prophecy.

The popular response to vivid accounts of past depressions is partly
psychological, but it has a rational base. We have to look at past episodes
because economic theory, lacking the physical constants of the hard sciences,
has never offered a complete account of the mechanics of depressions.

The Great Depression does appear genuinely relevant..., and many people have
been spooked by the story.

To understand the story’s significance in driving our thinking, it is
important to recognize that the Great Depression itself was partly driven by the
retelling of earlier depression stories. In the 1930s, there was incessant talk
about the depressions of the 1870s and 1890s; each of those downturns lasted for
the better part of a decade. ... Early in the Great Depression, people were
concerned that, as one observer put it in 1931, we may “pass through a long
period of mediocre business activity like that of the 1890s.” ...

Should President Obama have reinforced the Great Depression story? Perhaps he
had to take that risk to promote the economic stimulus plan, and not just hope
for some accident to save us. The story was already entrenched in our
consciousness, and will be with us until we see a real, solid boost from the
stimulus package and its likely successors.

According to the Reuters-University of Michigan Survey of Consumers earlier
this month, nearly two-thirds of consumers expected that the present downturn
would last for five more years. President Obama, in his first press conference,
evoked the Depression in warning of a “negative spiral” that “becomes difficult
for us to get out of” and suggested the possibility of a “lost decade,” as in
Japan in the 1990s. ...

The attention paid to the Depression story may seem a logical consequence of
our economic situation. But the retelling, in fact, is a cause of the current
situation — because the Great Depression serves as a model for our expectations,
damping what John Maynard Keynes called our “animal spirits,” reducing
consumers’ willingness to spend and businesses’ willingness to hire and expand.
The Depression narrative could easily end up as a self-fulfilling prophecy.

The popular response to vivid accounts of past depressions is partly
psychological, but it has a rational base. We have to look at past episodes
because economic theory, lacking the physical constants of the hard sciences,
has never offered a complete account of the mechanics of depressions.

The Great Depression does appear genuinely relevant..., and many people have
been spooked by the story.

To understand the story’s significance in driving our thinking, it is
important to recognize that the Great Depression itself was partly driven by the
retelling of earlier depression stories. In the 1930s, there was incessant talk
about the depressions of the 1870s and 1890s; each of those downturns lasted for
the better part of a decade. ... Early in the Great Depression, people were
concerned that, as one observer put it in 1931, we may “pass through a long
period of mediocre business activity like that of the 1890s.” ...

Should President Obama have reinforced the Great Depression story? Perhaps he
had to take that risk to promote the economic stimulus plan, and not just hope
for some accident to save us. The story was already entrenched in our
consciousness, and will be with us until we see a real, solid boost from the
stimulus package and its likely successors.